The Front

Expropriation Madness

Trade interests have again trumped citizen interests, as a chemical company has used an obscure but powerful provision of the North America Free Trade Agreement (NAFTA) to roll back a Canadian environmental and public health measure -- and to exact a reported $13 million from the Canadian government for its troubles.

In 1995, the Canadian parliament banned the import or inter-provincial trade of MMT, a gasoline additive that is manufactured only by the Richmond, Virginia-based Ethyl Corporation. MMT is used as a substitute for lead additive, which Ethyl also produced until recently.

Many scientists believe MMT, which contains the heavy metal manganese, to be a potential public health hazard. Automakers allege it gums up car engines.

Ethyl responded to the MMT ban with an unprecedented lawsuit.

It invoked a provision of NAFTA which allows companies to sue governments directly for expropriation of their property.

Then it argued that the government's ban on trade in MMT -- which had the same real-world effect as, but was technically different from, a direct ban -- discriminated against Ethyl. "Theoretically," said Ethyl Canada President David Wilson at the time the suit was filed, "in order to continue operating as a business, Ethyl is being required to build manufacturing and blending facilities in each of the provinces and territories of Canada. This is a local content preference that violates Canada's NAFTA obligations."

The company also argued that its reputation was damaged by the claim that MMT was harmful to human health. Proponents of the ban acknowledge that the scientific evidence around the health effects of MMT is uncertain, but say there is substantial cause for worry. They urge erring on the side of safety.

In sum, the company argued, the government's action effectively expropriated its property, including its expected future profits and goodwill.

While this argument may sound like the exaggerated rants of a bleary-eyed NAFTA critic who has spent too much time with his or her head buried in the NAFTA text, it turned out to be convincing enough to persuade the Canadian government to settle the case.

In July, the Canadian government agreed to rescind the MMT regulation, pay Ethyl a reported $10 million and issue a statement giving MMT a clean bill of health. Canadian government lawyers reportedly told officials they stood to lose much more if they failed to settle.

NAFTA critics blasted the settlement. "NAFTA leaves the government powerless to protect the health of Canadians, when big business interests are at stake," says Jo Dufay, national campaign coordinator of the Council of Canadians. "The makers of MMT have been given rights once reserved for governments -- and ordinary citizens, health and the environment are just left standing in the dust."

One particularly interesting perspective on the settlement was provided by lawyer Lawrence Herman, who was briefly consulted on the case in 1995 and thought its theory far-fetched. "The main reason I thought a trade case would be problematic in 1995 was because the investor-state arbitration provisions of NAFTA seemed confined to cases where governments took assets away by direct action and refused to compensate the investor," he wrote in The Financial Post in July.

"The intelligent and astute counsel to Ethyl Corp. has proved, however, the legal concept of expropriation and the protection afforded under NAFTA provisions go far beyond these traditional legal concepts," Herman wrote.

The MMT case "illustrates governments are at peril if they adopt measures having the 'effect' of expropriating foreign-owned assets, directly or indirectly," he wrote. "It shows using trade instruments to achieve public policy goals must be meticulously thought out and supported with impeccable scientific backstopping. Even then, there must be no hint of discrimination."

To prove the point, Barry Appleton, the lawyer who brought the MMT case, has filed in Canadian courts a notice of intent to file another, this time on behalf of a Tallmadge, Ohio-based company called S.D. Myers.

The S.D. Myers claim seeks $6.3 million in damages to compensate the company for a temporary Canadian ban on toxic PCB waste. The ban was in effect for 15 months, from 1995 to 1997. The Canadian government says it lifted the ban when it received information that the PCBs were being handled safely in the United States, but critics say the ban was lifted in anticipation of a potential NAFTA challenge.

In any case, S.D. Myers is not satisfied with a lifting of the ban. It is claiming in its suit that the ban amounted to an expropriation of the company's Canadian business, and that it is entitled to lost profits for the period while the ban was in effect.

"The effect of the PCB Export Bans has been to totally frustrate the Canadian operations of the Investor," says Myers' notice of intent to sue. "This has resulted in the deprivation of the benefits of the Investor's investment in Canada, constituting a measure tantamount to expropriation."

"Our company decided to seek compensation under the NAFTA for Canada's actions that prevented us from carrying out our lawful activity in Canada," says S.D. Myers President Dana Myers. "This was an attempt to substitute sales from an American company to our Canadian competitors. We believe that this action violates both the spirit and the text of the NAFTA."

"Canada's actions on the PCB export ban do not treat S.D. Myers fairly under NAFTA's investment chapter. Canada's decision to close the border to PCB exports makes poor policy sense and even worse trade sense, says Appleton."

"Myers used NAFTA to complain about Canada's PCB export ban, so the ban was lifted," says Maude Barlow of the Council of Canadians. "Now they are using NAFTA to demand payment for lost profits when the law was in effect. NAFTA empowers a company to force our government to have to pay for trying to protect the environment."

"Chalk this up to another NAFTA broken promise," says Lori Wallach, director of Public Citizen's Global Trade Watch.

"Ethyl's and now Myers' lawsuits show that trade agreements will be used to subvert environmental goals, something the United States [government] repeatedly denied would happen under NAFTA."

Environmentalists and consumer groups find the Ethyl and Myers cases particularly disturbing because the NAFTA provisions allowing companies to sue governments directly for expropriation closely track provisions in the proposed Multilateral Agreement on Investment (MAI).

The MAI is an international treaty now under negotiation among the rich countries of the Organization of Economic Cooperation and Development (OECD). It would extend NAFTA-like rules to investments in all signatory countries, with exceptionally broad definitions of what constitutes unfair burdens on foreign investors.

-- Robert Weissman

Blue Cross/Blue Criminal

Blue Cross/Blue Shield of Illinois, also known as Health Care Service Corporation (HCSC), pled guilty to eight felony counts and agreed to pay $144 million after admitting it concealed evidence of poor performance in processing Medicare claims for the federal government.

The company, the Medicare contractor for Illinois and Michigan, also admitted obstructing justice and conspiring to obstruct federal auditors.

The company will pay $4 million in criminal fines and $140 million in a civil settlement to resolve its liability under the False Claims Act.

At a news conference at the Justice Department to announce the guilty pleas, June Gibbs Brown, the inspector general of the Department of Health and Human Services, made it clear that the crimes of Blue Cross/Blue Shield of Illinois were in no way unprecedented.

"I would like to tell you this is an unprecedented cases, but it is not," Brown said. "Rogue contractors have been caught cheating the program in the past and I am sure, because of the vast amount of money spent on Medicare, others will be tempted to scam the program in the future."

By vast amount of money, Brown means $100 billion a year lost to health care fraud and abuse -- and that may be a low estimate, according to experts such as Harvard's Malcolm Sparrow, who believe that the number might be as high as $300 billion to $400 billion a year.

Over the past five years, Brown's office has investigated five additional cases that have resulted in criminal or civil actions against a Medicare contractor.

In 1993, Blue Cross/Blue Shield of Florida paid $10 million to settle charges that it falsified and failed to properly screen provider claims.

In 1994, Blue Cross/Blue Shield of Massachusetts paid a $2.75 million fine to settle charges that it falsified its performance reports.

In 1995, Blue Cross/Blue Shield of Michigan paid a total of $51.6 million to settle charges that it falsified audit reports and used Medicare money to pay claims that were the responsibility of other insurers.

In 1997, Blue Shield of California pled guilty and paid $12 million in civil penalties to settle charges of falsifying documents and failing to properly process claims and of destroying claims.

And in 1997, Blue Cross/Blue Shield of Massachusetts paid $700,000 to settle charges that it falsified statements related to its Medicare HMO application.

But the Blue Cross/Blue Shield of Illinois case was different at least in magnitude -- $144 million in fines and damages.

And the government had to be dragged kicking and screaming into the case. If it were not for a whistleblower, Evelyn Knoob, and her attorney, Ronald Osman of Marion, Illinois, the government would never have prosecuted the case.

Knoob began working at Blue Cross/Blue Shield's Marion, Illinois facility in 1983. Over the years, she witnessed a wide range of wrongful activity, including destruction and falsification of documents.

To anyone who has ever called their health insurer only to be met by maddening tape recordings or busy signals, Knoob knows why.

The government hired Blue Cross/Blue Shield to process claims. The company has been under contract with the Health Care Finance Administration to process claims submitted by Medicare beneficiaries and their doctors to other health care providers in accordance with Medicare coverage and payment rules.

To keep its contract, the company had to meet certain performance standards. For example, the company was supposed to answer 98 percent of the beneficiary calls within 120 seconds.

Knoob's supervisors had a way around this standard. They set up a monitor to keep track of calls. If this performance standard was about to be breached, Knoob and her colleagues were ordered to shut off the 800 line. Result: when a beneficiary called in to check on a claim, the line would be busy. A busy signal did not count as a call coming and thus did not have to be answered within 120 seconds.

In 1992, Congress held hearings about the busy signals Medicare beneficiaries were getting. The company felt the heat and changed strategies. According to Knoob, the company just stopped answering some calls. Beneficiaries would call and no one would answer.

Under the qui tam provisions of the False Claims Act, a private party may bring suit on behalf of the United States to recover damages resulting from the knowing submission of false claims to the government.

The party, in this case Evelyn Knoob, is entitled to receive 15 to 25 percent of the proceeds of the recovery in these cases.

That means Knoob will get anywhere from $21 million to $35 million for taking on a major corporate criminal -- her employer.

In addition to bringing the False Claims Act on her behalf, Ronald Osman, Knoob's attorney, went to the Justice Department Criminal Division in Washington, D.C. to seek a criminal prosecution for the destruction of documents and creation of false documents.

The Justice Department attorneys declined to bring the case. "I got upset," says Knoob's attorney, Osman. "I was saying that there were crimes committed, and they said, 'no.'"

Frustrated, Osman went back home and made a presentation to Chuck Grace, the U.S. attorney for the southern district of Illinois. Osman says he laid out the case for Grace in 102 memos.

Grace saw the crime, assigned a number of attorneys and FBI  agents to investigate the case. After two years, the company pled guilty to eight felony charges.

Osman adds that the Justice Department's Civil Division was also reluctant to enter the case. "They were not enthusiastic about the False Claims Act," Osman says.

-- Russell Mokhiber

The Lawrence Summers Memorial Award

The July/August 1998 Lawrence Summers Memorial Award* honors Bob Casey, assistant dean of the University of Texas, Austin College of Business Administration.

 "By running the college like a business, [University of Texas College of Business Administration Assistant Dean Bob] Casey said alumni and private donors get to help shape the product -- the students," reported the Daily Texan in an August article comparing the university's art museum's difficulties in raising funds and the business school's success.

"'We need to produce students with skills businesses want, create successful alumni,' Casey said. 'By involving business partners and alumni, their involvement and satisfaction leads to their contributions.'"

The Daily Texan story continued: "One problem the College of Business Administration has faced is that most of its donations come from corporations, Casey said, because they receive the greatest benefit in the shortest amount of time. Alumni though, don't get the student product right away and so the college has to appeal to them in a tangible way, which why it has specialized centers of excellence in place, Casey said."

One example of a specialized program "is the center for Business Measurement and Assurance Services, a program offered through the accounting department."

(Source: Suzannah Creech, "Art museum struggles with funding goals," Daily Texan, August 6, 1998, courtesy of Bill Medaille.)

*In a 1991 internal memorandum, then-World Bank economist and current Deputy Secretary of Treasury Lawrence Summers argued for the transfer of waste and dirty industries from industrialized to developing countries. "Just between you and me, shouldn't the World Bank be encouraging more migration of the dirty industries to the LDCs (lesser developed countries)?" Summers wrote. "I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that. ... I've always thought that underpopulated countries in Africa are vastly under polluted; their air quality is vastly inefficiently low [sic] compared to Los Angeles or Mexico City." Summers later said the memo was meant to be ironic.